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Funder and lawyer: is there scope to play both roles in a class action

The Supreme Court of Victoria has held that the proper administration of justice requires that a solicitor and senior counsel with an indirect financial interest in a proceeding through a litigation funding company should be prevented from acting.1

Background

The Plaintiff (“Bolitho”) commenced a class action on 24 December 2012 against finance company Banksia Securities Limited (Receivers and Managers Appointed) (In Liquidation) (“Banksia”) and others including former auditors, directors and other persons associated with Banksia for alleged breaches of the Corporations Act 2001 (Cth). Bolitho’s solicitor, Mr Mark Elliott, agreed to act on a “no win no fee” basis (entitling him to a 25% uplift fee upon “winning”) and to indemnify Bolitho against any liability arising out of the Proceeding. Under the indemnity, Bolitho was required to accept and act promptly upon all advice which he is given by his solicitor and his Senior Counsel, Norman O’Bryan SC, retained in the Proceeding.

Following the pressing of security for costs applications by the defendants, Mr Elliott arranged for Bolitho to enter into a litigation funding agreement (“Funding Agreement”) for the proceeding with a litigation funding company whose majority shareholders included, indirectly, Mr Elliott as well as the wife of Mr O’Bryan. Mr Elliott was also one of three directors of the funder. Under the Funding Agreement, Mr Elliott, Mr O’Bryan and the funder had various controls over the class action proceeding and the decisions to be made in it. The funder was also entitled to a fee of up to a maximum of 30% of the net proceeds of any settlement or judgment.

The Fifth Defendant (supported by a number of other defendants) sought an order that Bolitho be restrained from retaining Mr O’Bryan and Mr Elliott in the proceeding, on the basis that both were in positions of conflict. Specifically, it was argued that there was potential for Mr Elliott and Mr O’Bryan to prefer their personal or family interest, above their duties to the Court, Bolitho, the class represented by Bolitho and relevant companies.

Decision of the Honourable Justice Ferguson

Justice Ferguson found that Messrs Elliott and O’Bryan should be restrained from acting on the basis of the Court’s inherent jurisdiction. Her Honour held that their indirect financial interest in the proceeding posed such risk to the administration of justice, including the appearance of justice, and integrity of the judicial system that a fair-minded, reasonably informed member of the public would conclude that they should be restrained from acting.

Her Honour considered that the Funding Agreement “skirt[ed] around” the prohibition on lawyers charging contingency fees. Further, Her Honour recognised that Bolitho’s lawyers held a large amount of control over the proceeding and stood to make substantial profit or loss, depending upon the outcome of the litigation.2 As such, Her Honour found that there was a real risk that Bolitho’s lawyers would not be perceived to be exercising the necessary objectivity and independence.

Her Honour found that the difficulties arising from Mr O’Bryan and Mr Elliott’s competing interests could not be overcome by Bolitho having received independent legal advice in relation to the proceeding and litigation funding arrangement. Justice Ferguson considered that it was the lawyers’ duties to the Court that were at risk.

Ultimately, while Ferguson J held that it was appropriate to restrain Messrs O’Bryan and Elliott from continuing to act, Her Honour did not then make orders to this effect as they were not parties to the proceeding. Rather, Her Honour invited them to consider their respective positions after reading her reasons, following which orders would be made.

Following the decision, Bolitho has obtained new solicitors. Those new solicitors have since informed the Court that Mr O’Bryan’s wife has relinquished her interest in the funder, so it appears Mr O’Bryan may continue to act as Senior Counsel for Bolitho.

Implications of the decision

Dual funder / lawyer

Justice Ferguson’s decision recognises the potential conflict that arises when a lawyer has a financial interest in the proceeding, and suggests that Courts will take measures to ensure that the interests of justice are protected when such a conflict occurs. This case raised similar issues to those faced by the Federal Court in the Equine Influenza class action. In that case, which has been examined in previous editions of Class Actions Update, Claims Funding Australia Pty Ltd (“CFA”), an entity closely associated with Maurice Blackburn, sought Court approval to fund the class action in which Maurice Blackburn, was also acting. In particular:

Maurice Blackburn’s Chairman, Steve Walsh, was a CFA Director,

Maurice Blackburn’s Chief Executive and national head of employment and industrial law practice were CFA shareholders, and

all of the firm’s principals were beneficiaries of the discretionary trust formed to set up CFA.

On 29 January 2014, CFA discontinued its application in the Federal Court. Maurice Blackburn stated that the application was discontinued on the basis that public statements by the Commonwealth Attorney-General to the effect that changes may be made to prevent litigation funders owned by the lawyers representing claimants from having a role in such cases. We anticipate that this issue will receive closer attention, particularly given the Productivity Commission’s recommendations to allow contingency fees.

The broader context: dual roles for lawyers?

There have been other class actions before the Honourable Justice Ferguson which have raised issues about conflicts of interest and the dual role of plaintiff and lawyer.

As outlined in the previous edition of Class Action Review and in KWM alerts, Mr Elliott is the sole director and shareholder of Melbourne City Investments Pty Ltd (“MCI”). In proceedings against Treasury Wine Estates (“Treasury”) and Leighton Holdings Limited (“Leighton”), MCI is acting as lead plaintiff for the group members, while Mr Elliott was also the legal representative for each group and was funding the litigation on a no win-no fee basis. On 23 July 2014, Ferguson J held that Mr Elliott ought to be restrained from acting for MCI in the proceedings against Treasury and Leighton whilst MCI is the lead plaintiff, and that the proceedings ought not be permitted to continue as group proceedings whilst MCI and Mr Elliott were acting in tandem as plaintiff and solicitor.3

General update on the Banksia proceeding

Shortly prior to Ferguson J delivering judgment in the Banksia class action, the receivers and managers of Banksia (“Receivers”) commenced proceedings against the directors, auditors and other persons arising out of the collapse of the company. There is significant factual overlap between these proceedings and the class action, and the Receivers have recently filed an application to stay the class action permanently. The application will be heard in the new year.

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